Commercial Lease Solicitors

Commercial leases vary in length and content; the terms depend on the specific requirements of the landlord and tenant and the type of property let. However, provisions that you would expect to see include:

• A description of the property being let, normally by reference to a plan
• The term of the lease
• The annual rent payable and the dates on which it must be paid
• Provisions for review of the rent, normally included where the term of a lease is longer than five years
• The ‘permitted use’, limiting the type of business the tenant may conduct in the property
• Insurance obligations for both parties
• The landlord’s and tenant’s responsibilities for maintenance and repairs
• How service charges are calculated and paid
• Restrictions on the tenant’s ability to assign the lease or sublet the property
• Restrictions on the works and alterations that a tenant may carry out to the property

Whether the tenant has security of tenure under the Landlord and Tenant Act 1954 (whether the tenant is entitled to stay and request a new lease at the end of the term)

A typical lease transaction should take on average between one and three months to reach completion (or exchange of contracts if an agreement for lease is being entered into); six weeks is a good estimate. It depends on the other parties involved, how quickly information is provided, how negotiations progress and the complexity of the parties’ requirements.

Due diligence

A solicitor’s involvement here is key:

The landlord’s solicitor collates a set of documents to provide to the tenant’s solicitor: Land Registry title documents, replies to Commercial Property Standard Enquiries (CPSEs), and other property specific documents. They will also advise how to answer enquiries, reducing the risk of misrepresentation.

The tenant’s solicitor will carry out a comprehensive due diligence exercise on the property to ensure the tenant is aware of any risks there may be and can use the property for its business. This involves investigating the title to the property, carrying out searches and raising enquiries, then reporting to the tenant on it all.

Drafting a lease and documentation

The landlord’s solicitor will draft the lease. There may be a rent deposit deed governing how a deposit is held and may be used.  The landlord may also grant a licence for the tenant to carry out alterations to the property. The tenant’s solicitor will negotiate these, advise on the key terms, and ensure the terms do not place an abnormal burden on the tenant.

It may be necessary for the parties to exchange an ‘agreement for lease’ first and complete the lease later: for example, where the tenant needs planning permission for its intended use or for the landlord to complete works to the property.

Where the tenant is the first one following completion of a development, collateral warranties from the building contractor and members of the professional team may be advisable to give direct recourse against them, as a landlord will usually want to limit its liability for defects to those that appear within 12 months of completion of the works.

All these documents are detailed and lengthy. We will cut through the detail and draw the important points to your attention. A specialist commercial property solicitor’s experience here is invaluable.

Completion of the transaction

Once the transaction documents are agreed and signed by all parties, the solicitors will exchange the agreement for lease, if there is one, or move straight to completion of the lease and associated documents. The solicitors will also handle the transfer of money between the parties, such as a rent deposit.

Depending on the length of the term of the lease and the level of annual rent, the tenant may be legally required to file a Stamp Duty Land Tax return.  There are also Land Registry requirements or best practice to protect the lease and rights granted in it. The tenant’s solicitor will handle all this for you.

A lease assignment is the name given when a tenant intends to transfer the lease to another person. The lease will set out whether this is permitted and to what extent.

Typically, the consent of the landlord is required (given in a ‘licence to assign’) and this may not be unreasonably withheld. The landlord may refuse consent, or impose conditions to the grant of consent, where reasonable to do so.

In addition, the lease may set out circumstances that will allow the landlord to refuse consent: for example, if the proposed new tenant does not have the financial standing to comply with the lease.  The lease may also set out conditions that the landlord can impose whether reasonable or not: for example, that the new tenant provides a deposit or has a guarantor.  These terms must be carefully considered when the lease is granted.

If the lease was granted on or after 1 January 1996, a tenant who lawfully assigns it will be automatically released from future liability under the lease. However, where the lease allows it or it is reasonable, the landlord may require the outgoing tenant to enter into an ‘authorised guarantee agreement’.

Our commercial property team regularly assist landlords in dealing with applications for consent, and tenants seeking to assign, or take an assignment of, their leases.

What is an authorised guarantee agreement?

An authorised guarantee agreement (or ‘AGA’) is a guarantee by a tenant assigning a lease that if the new tenant does not pay the rents or comply with the lease terms, the assigning tenant will do so. An AGA also usually contains an indemnity to cover the landlord’s losses resulting from any non-compliance by the new tenant.

In circumstances where the lease is forfeited by the landlord or liability is claimed by the new tenant’s insolvency practitioner, often an AGA will allow the landlord to require the old tenant to take a new lease for the period until the lease would have ended or pay a sum of up to six months’ rent.

The lease will set out whether the tenant may lawfully grant a sublease (or underlease) of the property and to what extent.

Usually, a tenant will need the consent of the landlord (given by a ‘licence to underlet’) and this may not be unreasonably withheld. The landlord may refuse consent, or impose conditions to the grant of consent, where reasonable to do so or where the lease allow it to.

The lease often lists a number of provisions that the sublease will need to include: for example, that the rent must be at least the market rate, that landlord’s consent is needed for the same things as under the superior lease, and that the subtenant must pay the same service and insurance charges as the tenant.

A commercial lease can be terminated early in various circumstances.

Forfeiture: A commercial lease will usually give the landlord the right to forfeit it if the tenant is late in paying the rent (typically by 14 or 21 days) or if the tenant suffers some insolvency event. It will also allow the landlord to forfeit if the tenant is in breach of covenant and has failed, if remedy is possible, to remedy the breach within a reasonable period of time of receiving notice to do so.

A landlord should consider the knock-on effects of forfeiture: it may take time to re-let the property in a poor market and responsibility for business rates will lie with the landlord.

A tenant may apply to the court for relief from forfeiture to get its lease back.

Our dispute resolution team is able to advise landlords and tenants on their rights and options relating to forfeiture.

Break: A lease may include the option for the tenant or the landlord (or both) to terminate the lease early by serving notice on the other party. This may be on a specific date or dates, or it can be at any time (known as a ‘rolling break’).

The lease will specify the period of notice that must be given before a break date and how notices need to be served. There are also likely to be conditions for a tenant to satisfy for the break to be valid, such as payment of the rent up to date and giving up occupation of the premises.

It is vital that a break notice is validly served in accordance with the terms of the lease and that any conditions are strictly complied with. If you fail to do so, the lease will continue and you will remain tied to it. Early legal advice is essential and our commercial property team can help you avoid the pitfalls.

Surrender: A surrender is where a lease ends by mutual agreement between the landlord and the tenant. The parties usually enter into a ‘deed of surrender’. One party may pay the other for the surrender and the deed should also deal with other liability that might exist under the terms of the lease.

Disclaimer: Disclaimer is where a tenant enters into liquidation or bankruptcy and the liquidator or trustee in bankruptcy disclaims liability under the lease as an ‘onerous contract’.

Under the security of tenure provisions of the Landlord and Tenant Act 1954, when the contractual term of a commercial lease ends, a ‘qualifying tenant’ is entitled to stay in the premises (this is called ‘holding over’) and take a new lease.  Advice is needed on whether the tenant qualifies, but broadly it needs to be in occupation for the purposes of its business when the lease ends.

A lease with those statutory rights (security of tenure) is referred to as ‘inside the Act’ and a lease where those rights have been contracted out is referred to as ‘outside the Act’.

The tenant may serve a notice (a ‘section 26 notice’) terminating the tenancy and requesting a new one on the same terms as the old lease, subject to reasonable modernisation and at a new market rent. If the parties cannot agree those terms by a deadline, the tenant will need to apply to court to decide them.

The landlord may also serve a notice (a ‘section 25 notice’) terminating the tenancy and offering a new one on the same basis.

However, the landlord may oppose the tenant’s notice or choose not to offer a new tenancy. It may only do so on statutory grounds, such as where it intends to redevelop the building, requires the property for its own occupation or where the tenant has been in persistent breach of certain terms of its lease. Our dispute resolution team can handle the service of notices and deal with disputes about the new lease terms.

That said, it is very common to contract out of the tenant’s statutory rights before completion of a commercial lease or, if an agreement for lease is being used, before exchange of contracts. The landlord must serve a statutory notice on the tenant, who must make a declaration agreeing to this, and this must be recorded in the lease (and any agreement for lease).

If the lease is contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954, the tenant has no right to stay when the term ends and is not entitled to a new lease. Whether it can obtain a new lease will be a matter of negotiation with the landlord.

Dilapidations are items of disrepair or other non-compliance with the terms of a lease: typically the covenants to keep the premises in repair, to decorate them and to reinstate alterations.  The term is more commonly used to describe the property when a lease ends, but it can also be used to describe breaches during the term of a lease.

Most commercial leases require a tenant to “keep the property in good and substantial repair and condition”. This is a high bar, legally meaning that a tenant must put the property into a good state of repair and condition if it is not already and then keep it in that state for the duration of the lease.  When the lease ends, they will be required to complete any repairs, redecorate, and also reinstate (reverse) any alterations they have made.

Before agreeing a commercial lease, a tenant should consider these obligations carefully. If a property is a poor state of repair, tenants should try to limit their repairing obligations with a schedule of condition, whereby they are not required to leave the property in a better state of repair than as evidenced by the schedule.

At the end of the lease term, if a tenant fails to return the property to the landlord in the condition required by the lease, the landlord will normally serve a ‘schedule of dilapidations’ and seek to recover the costs for remedying the defects in a claim for damages. There are statutory limitations to what the landlord may claim and advice should be taken from a specialist surveyor. Our dispute resolution team can assist in settling claims about dilapidations or with court proceedings if the parties cannot agree.